Risks in the Stock Market Dead Zone

There is an old saying in the stock market, sell in May and go away. The point being that trading volume falls off and stocks tend to lose value over the summer holidays. CNBC writes about this stock market dead zone.

Wall Street may be primed for a pullback as the official start of summer gets under way, if history is any guide.

Chris Verrone, a technical analyst at Strategas Research Partners, said in a note Tuesday that stocks are “approaching the more difficult stretch of the calendar.”

Wall Street may be primed for a pullback as the official start of summer gets under way, if history is any guide. Here is the graph that accompanies the article.

Although the NASDAQ has been more volatile over summer than the NYSE over the last 30 years both end up substantially lower on the average by the time prices start picking up in September. What are the risks in the stock market dead zone for trades who stay at their trade station for the summer?

If You Stay Invested You Will Lose

The message from years of watching the market in the summer is that if you stay invested you tend to lose money between May and September. Even the big professionals tend to back off from the market for the summer. Market Watch says the market’s next 5% move is down so sell for the summer.

The next move of 5% or is “more likely down than up,” Bianco and his team wrote in a note dated June 9.

“The rally so far is justified, but we think it has reached its near-term limits and is vulnerable to summer fatigue and rising anxiety over whether Congress can make pragmatic decisions,” the Deutsche Asset Management team said.

U.S. lawmakers are likely to deliver a significant and simple corporate tax cut, but such legislation is not clearly on the horizon and probably won’t appear there until after their August recess, according to Bianco & Co.

But if you sell your winners now you will pay capital gains taxes and have less to reinvest come the fall. And for that matter do all stocks take a nosedive in the summer?
There are stocks whose fundamentals are strong and not subject to the summer blahs. NASDAQ writes about two stock picks for a quiet summer market.

Microsoft’s focus on cloud services for businesses and the success of the Surface have led to a resurgence in growth. Year on year revenue growth of close to 28% and improved margins are hard to achieve when that revenue is well over $85 billion, and maybe that is why the market has not yet come to terms with the company’s success.MSFT was at around $37 when I wrote the above referenced article and is now over $70, but is still trading at a fairly average forward P/E of 21. The stock looks destined to move up, almost regardless of what the rest of the market does through the summer.

Medpace (MEDP) is an Ohio-based company that provides drug development and trial services to the pharma and biotech industries. Given the pace of development of new therapies, this is a rapidly growing field, and that is reflected in Medpace’s numbers with year on year quarterly earnings growth of 145%.

In both of these cases strong fundamentals probably trump the summer slump issue. There are risks in the stock market dead zone but there are also winners if you look hard enough.

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